28/11/2010 (Business Recorder) - Malaysian palm oil should fall to 2,600 ringgit ($830) by June 2011 on higher output in Southeast Asia and a decent soy crop but the pace of decline will be slower than the market expects, thanks to unusually low stocks, a key analyst said on Friday.

The forecast by LMC Chairman James Fry represents a fall of 20.6 percent from current palm oil futures, which closed at 3,276 ringgit per tonne on Thursday, and takes into account palm oil's higher than usual premium over diesel.

"It is hard to see why this gap should widen since biofuel demand can adjust downwards. A normal crude palm oil to diesel gap of $150 by June means 2,600 ringgit," London-based Fry told an industry meeting in the Malaysian capital.

"Weak output and high exports imply low stocks till mid-2011, pushing spot CPO above soyoil prices. After that, output and stocks should grow strongly."

Front-month crude palm oil has gained 30 percent this year on fears that heavy rains induced by La Nina will hurt output in top producers Indonesia and Malaysia, outpacing US soyoil's rise of 24 percent. That means crude palm oil futures will have to remain in backwardation, which will prompt overseas buyers to delay purchases, Fry said.

Competing soyoil will increasingly fill global vegetable oil demand, given a recent surge in palm prices and the approach of the northern hemisphere winter, when the tropical oil solidifies. Soyoil will be attractive to buyers as South American planting has not been so much affected despite the warnings about the La Nina-driven drier weather potentially sapping yields, Fry said.

Although palm oil output and stocks will be tight for the next few months, new areas, mainly in Indonesia, that are coming into production due to a commodities boom in 2007-2008 will add at least 3.5 million tonnes to total output, Fry said. Malaysia and Indonesia account for 85 to 90 percent of total global output of about 43 million to 45 million tonnes.